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June 14, 2012

In a U.S. operation dubbed "Dark Angel," local and federal law enforcement officers on May 30 arrested 20 individuals involved in methamphetamine trafficking across five states. Authorities confirmed that the leader of the trafficking network, Armando Mendoza-Haro, has links to Mexico, where the methamphetamine was likely produced. The group appears to have used legitimate companies to transport methamphetamine from California to the Denver area and elsewhere in the Western and Midwestern United States. The group then sent the profits back to California, where the cash was wired to banks in China and the Cayman Islands.

Mexico's methamphetamine trade seems to be booming these days. Earlier in 2012, the Mexican military made the largest single seizure of methamphetamine ever (15 tons, worth around $1 billion) outside Guadalajara. As the United States increased its restrictions on the pharmaceutical chemicals used to produce methamphetamine, Mexican producers stepped in to meet the growing demand. Details from Operation Dark Angel provide insight into how traffickers in the United States are getting their product to market and, more interestingly, how they are laundering their profits.

Compartmentalizing

The Mendoza-Haro organization appears to be a midsized trafficking operation. Agents who arrested the group and raided properties seized only 2.7 kilograms (6 pounds) of methamphetamine and $715,340 in cash (the approximate street value of 7.2 kilograms of methamphetamine). However, this only represents a single shipment. The group handled what appear to be dozens of similar-sized shipments, so total revenues likely added up to millions of dollars over time. According to The Denver Post, authorities involved in Operation Dark Angel believe the drugs were made in Mexican methamphetamine labs. Additionally, the U.S. Drug Enforcement Administration (DEA) special agent in charge of the operation said the group was transferring drug proceeds to drug cartel members in Mexico.

One of the defendants, Miguel Angel Sanchez, owned Playboyz Trucking LLC in San Bernardino, Calif. Authorities say that some of the Playboyz drivers knowingly transported the group's methamphetamine and cash revenues between California and Colorado, while other drivers were unaware of their cargos' contents. For example, the $715,340 in cash that authorities seized during the May 30 raid was found hidden in a truck carrying milk.

According to the indictment, more than a dozen people in Colorado, California, Utah and Iowa were involved in trafficking methamphetamine under the command of Mendoza-Haro and Sanchez. The evidence comes from intercepted telephone conversations between Mendoza-Haro, Sanchez and the other defendants that indicate the defendants knowingly participated in the drug smuggling. And there is a pattern in the intercepted phone calls: Mendoza-Haro was evidently in contact with nearly all of the accused smugglers, but there were very few conversations among the smugglers themselves. This group is a good example of how trafficking rings tend to compartmentalize their operations for the sake of operational security.

Money Laundering

The indictment connects two individuals in California to most of the money-laundering charges: Ricardo Paniagua-Rodriguez and Carlos Martin Segura Chang. There are no public records available for Paniagua-Rodriguez that explain how he may have been involved in the trafficking group. He was arrested near the U.S.-Mexico border in San Ysidro, Calif., a location that would easily allow him to facilitate financial transactions with groups in Mexico. As for Chang, public records indicate that he used to own (and may still own) Schang Import/Export Service, which is registered under a residential address in Downey, Calif., where police arrested him.

The indictment does not specifically mention the import/export company as a part of the operation; according to public records, the company opened its doors in August 2008 and reported trade activity only in November 2008, so it's difficult to say definitively whether the company was used to help launder drug money. However, the only country Schang was licensed to import from was China, which means the company would most likely have bank accounts to transfer money to China to buy goods. Since some of the trafficking group's laundered money was going to China, we find it likely that Chang served as some kind of international conduit for the Chinese money-laundering aspect of the operation.

The details of this case aren't necessarily normal operation procedure for drug traffickers in the United States. Many midsized, U.S.-based trafficking gangs like the Mendoza-Haro group purchase drugs wholesale from intermediary groups in the border area who have already paid the cartels in Mexico and derive most of their profits from simply getting the drugs across the border -- a specialized, value-added skill in its own right. But DEA evidence of the Mendoza-Haro group's links to Mexico and the routes the group's revenues were laundered through suggest that it may not have exclusively dealt with border intermediaries.

The border drug trade is complicated and diverse. There is not necessarily a standardized practice that everyone follows. It is likely that in this case, the Mendoza-Haro group was purchasing from a contact in Mexico. If so, then routing drug sale revenues through China would make sense. Many money-laundering cases have involved U.S.-based launderers transferring illicit funds to China to purchase consumer goods like refrigerators and televisions that were then shipped to Mexico and sold legitimately to recuperate the profit from the methamphetamine sales. Another possible motive for moving the money to China would be to purchase precursor chemicals in China that would then be exported to Mexico to make more methamphetamine. Additionally, the group could have used the Cayman Islands' banking system -- which is known for its privacy -- to transfer money to drug kingpins anywhere in the world.

It appears that the leaders of the Mendoza-Haro group compartmentalized the money-laundering arm of the operation as well as the transportation arrangements. The indictment charges Paniagua-Rodriguez and Chang only with money laundering; there is no indication that they were involved in actual trafficking. Frequently, owning a legitimate business is a boon to money launderers because it provides a legal cover for illegal activities -- much as Sanchez's legitimate trucking company gave him a way to move methamphetamine discreetly.

Authorities allege that the Mendoza-Haro group laundered money using the "smurfing" tactic. This involves breaking a lump sum -- likely valuing in the hundreds of thousands of dollars -- into smaller individual deposits under $10,000 that are then put into various accounts. (It is standard banking practice to issue suspicious activity reports for deposits of $10,000 or more.) In this case, Denver police alerted the DEA of the group's activities in July 2011, so the authorities were able to track the group's smurfing tactics even though the deposits were too small to be automatically flagged by the banks. The police also probably retrieved banking statements after the fact to confirm the amounts deposited. Charges in the indictment support the smurfing allegations: According to the indictment, members of the gang typically engaged in a flurry of financial activity over the span of a day or two, followed by a week of inactivity before another flurry of deposits. This financial activity likely corresponded with the arrival of cash shipments that went from Colorado back to California on Sanchez's Playboyz trucks.

While the Mendoza-Haro group was able to utilize a legitimate trucking company and possibly Schang's import/export company, it does not appear that it had much legitimate help depositing the money. Larger trafficking and money-laundering operations usually set up shell companies with high cash turnovers, such as restaurants or casinos, to blend illegitimate funds with legitimate funds by fudging the accounting books. This more sophisticated approach makes smurfing unnecessary but also requires more organization and a wider network of individuals. Once the money is cleanly deposited into a bank account, it can be moved around through legitimate financial channels to reach its intended recipients.

A small group like the Mendoza-Haro organization, however, probably didn't have sufficient funds to justify an elaborate system of concealing their payments, which were likely in the hundreds of thousands of dollars. If a group is only moving hundreds of thousands of dollars in revenues at a time, rather than millions of dollars, smurfing is much more feasible than creating and using shell companies.

The Mendoza-Haro operation is one of hundreds, if not thousands, of midsized, U.S.-based trafficking groups likely using legitimate businesses to move their drugs and launder the proceeds. In this case, a trucking company and possibly an import/export business appear to have provided cover for the group's illegal activities. While this particular organization doesn't appear to have used legitimate companies to deposit its money, many other trafficking groups have the resources for sophisticated laundering operations that do utilize the legitimate economy. The largest criminal organizations are powerful enough to enlist the aid of corrupt bankers and other financial service providers.

While the violence associated with the Mexican drug trade is highly visible to the public, less visible financial crimes stemming from the drug trade occur on a daily basis and receive far less attention from the media. The scale of violence seen in Mexico has not yet crossed the border into the United States, but the financial crimes that fund the violence certainly have.

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